Scenario: User Generated

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Scenario:User Generated

Our users have spoken. A total of 3,026 votes were cast on The Committee, a bit larger than the number of total delegates who are attending the 19th Party Congress. Based on the results, the top five candidates are (in order of number of votes):

• Chen Min’er (47%)

• Wang Yang (45%)

• Wang Qishan (44%)

• Li Zhanshu (38%)

• Hu Chunhua (37%)

Users have created a lineup that completely matches our “Norm Wrecking” scenario, which was assigned the lowest probability in our judgment. Our users appear to be leaning toward a very powerful Xi Jinping who is unconcerned about even the hard norms that have guided leadership successions.

Other candidates, including Zhao Leji, Han Zheng, Cai Qi, Wang Huning, and Sun Chunlan, rounded out the top ten, but did not get enough votes to move into The Committee. Most of them, however, are likely to remain in or move up to the Politburo.

In about five days, we will know whether the user-generated scenario turns out to be correct.

Scenario 1: The “Xi Men” - 55% Probability

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Scenario 1:The “Xi Men”

What: This is our base case for the most likely outcome of the 19th Chinese Communist Party (CCP) Congress—namely, that a uniquely powerful Xi Jinping will be able to bend norms to put his favored candidates onto The Committee. But we assign a probability of just 55% to this prospective outcome—slightly better than even—because this political cycle carries more uncertainties than the previous one at the 18th Party Congress in 2012.

Much of this uncertainty hangs on whether established norms will continue to guide China’s political transitions in the post-Mao era. If they do, then the political transition will be relatively predictable and The Committee’s lineup fairly standard (see Scenario 2). Our base case, however, assumes that Xi is likely to ignore some of these norms to get his preferred outcome.

During Xi’s first term as CCP General Secretary, signs have emerged that he does not necessarily believe that every transition norm should hold. These can be further divided into what may be considered “soft” and “hard” norms. Soft norms include understandings about the importance of seniority, that promotions should not skip over designated grades, and that those promoted must have significant prior experience at the provincial level—all of which may have become more arbitrary criteria under a strengthened Xi.

Hard norms include retirement age and term limits—that is, members of The Committee who reach 68-years old must retire and each member, including even the General Secretary, can only serve two five-year terms. Although a recently floated trial balloon suggested that even the age limit might be up for negotiation, this appears to be nothing more than a trial balloon. We assume that this hard norm will be respected.

As such, the composition of The Committee in this base case is predicated on both the weakening of soft norms and the adherence to the strongest hard norms: age and term limits. Even as the more arbitrary norms of seniority and gradual promotions are scrapped, Xi does not appear willing to dispense with the entire institutionalized process established in the Deng Xiaoping era. This typically includes injecting younger, new blood into the top ruling body to cultivate heirs apparent—the next General Secretary and sometimes even the Premier—who generally will serve on The Committee for five years before they are handed the reins.

Moreover, with one exception, all new members of The Committee in this configuration are already sitting in the previous 25-member Politburo, just one level down. (This talent pool from which The Committee is usually selected technically includes 24 members now after the removal of former Chongqing Party Secretary Sun Zhengcai in July 2017.)

What this means is that the next General Secretary and Premier, who will be formally selected at the 20th Party Congress in 2022, will likely be among the five candidates entering The Committee now. However, the candidates for the top post in 2022 will not include Xi, because in accordance with the hard norm of a 10-year term limit, this base case also presumes that Xi will step down as General Secretary and not serve a third term.

Ultimately, this base case would be a testament to Xi’s political strength, since appointing his preferred candidates with near impunity or at least by forcing a consensus implies that he will emerge from the Party Congress at the apex of his power. That power would be clearly demonstrated if Xi proves able to flout soft norms and rapidly elevate confidantes and protégés onto The Committee.

Who: In addition to Xi and Li Keqiang, who will retain their jobs, the five new members likely to join The Committee in this base case are listed below. As implied by the very name of this scenario, the configuration would be stacked with Xi’s close colleagues, including Li Zhanshu, Wang Huning, and Chen Min’er.

This composition omits the current anticorruption czar Wang Qishan, who, although personally close to Xi, is 69 years of age and thus bound by the hard norm to step down and make way for a younger cohort of leaders (Wang could still exert continued informal influence on economic policy from behind the scenes). Also, by assuming that certain soft norms will not hold, this configuration exempts some candidates who might have qualified for The Committee based strictly on seniority.

Xi Jinping (Age 64)

Li Keqiang (Age 62)

Wang Yang (Age 62)

Wang Huning (Age 62)/Zhao Leji (Age 60)

Chen Min’er (Age 57)

Li Zhanshu (Age 67)

Hu Chunhua (Age 54)

If this is indeed unveiled as the official lineup of The Committee, then Chen would be expected to handle Party-related work, including the secretariat and General Office, propaganda, and the Central Party School, which, according to prior precedent, should set him up to be Xi’s successor. Hu Chunhua, the current Party Secretary of Guangdong Province, is included in the seventh spot as executive vice premier, a traditional stepping stone to becoming the Premier but not necessarily a steadfast or inviolable rule.

Both Chen and Hu are in the right age bracket to be able to serve in the CCP’s top posts after 2022. In fact, Hu, at 54, is the same age as Xi was when he entered The Committee in 2007. Chen, meanwhile, is a few years older, but at 57 should technically still be able to serve two terms as General Secretary if he can secure the position. But elevating Chen, who is currently not even in the Politburo, so rapidly would be a clear sign of Xi’s political clout and his ability to flout soft norms. This means that Chen and Hu would form China’s next top duumvirate, replacing Xi and Li, at the next transition.

Although there is considerable debate over Hu’s prospects, the base case presumes he will be promoted, in part based on the assumption that Xi is personally closer to his predecessor Hu Jintao than is publicly acknowledged. As such, elevating the younger Hu—who has ties to the older Hu—might be a gesture to reciprocate for the former General Secretary’s willingness to relinquish all formal posts, including the military portfolio, to Xi in 2012, something Hu Jintao’s own predecessor did not do. The same logic can be applied to the inclusion of Wang Yang, who isn’t strictly tied to Xi’s political network but has, over Xi’s first term, appeared to become part of the policy inner circle.

Still, the elevation of these men would not simply be a function of patronage or reciprocity. Each of these new members, including the potential successors such as Chen and Hu, happen to be qualified by both experience and age to sit on The Committee. Chen and Hu have run both a rural province and an urban region. For Chen, these were poor Guizhou and wealthier Chongqing; for Hu, they were fast-growing but poorer Inner Mongolia and wealthy Guangdong. This experience is a reliable resume builder, and almost all top Chinese leaders have served rotations in two provinces with widely varying socioeconomic conditions, accruing experience before being plucked to govern in Beijing.

Yet this experience is not as reliable a predictor for ascending to The Committee in this scenario because it is considered a soft norm—instead, Xi’s personal and political networks count as a stronger indicator. That is why this base case includes Wang Huning, an unlikely candidate based solely on experience and current position but often considered to be one of Xi’s closest policy advisors. One alternative to Wang for a seat on The Committee would be Zhao Leji, who currently heads the CCP Organization Department.

One other notable candidate is Li Zhanshu, Xi’s “chief of staff” and one of his closest comrades. In this configuration, Li could be expected to take over the anticorruption portfolio. But given Li’s age, this posting would likely be his swan song and he would aim to make a mark in this crucial portfolio by continuing the systemic corruption crackdown begun by Xi and Wang.

Implications: A strengthened Xi with his preferred team in place would bode well for economic reforms and should generally be well-received by markets. Most of these men are not considered liberals in the Western sense, but neither are they anti-market zealots. On the economic front, China’s problems are clear to all top policymakers and the need for change is pressing. Vested interests have long stymied decisive economic policy change, so a unified ruling body stacked with Xi’s acolytes would at least remove some of those obstacles.

With this team of “Xi Men” in place, Xi’s first-term preoccupation with CCP discipline and political rectification might recede. The Committee in this base case would thus signal an endorsement of Xi’s authority and a consensus around his preferred policies. This suggests that more attention and capacity could be devoted to focusing on executing the many economic reforms that have stalled or taken a backseat to politics.

The bottom line is that this political outcome should be more positive for economic reforms in a structural sense, especially once the new government under the State Council is formed in March 2018. This could lead to another, even more crucial Third Plenum later in 2018, when Xi is expected to mark the 40th anniversary of “reform and opening up” that Deng launched in 1978.

Scenario 2: Norm Adhering - 35% Probability

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Scenario 2:Norm Adhering

What: This scenario would be more consistent with past patterns and, in our view, has a better than one in three chance of materializing. Although it is not the base case, the probability of this outcome remains fairly significant. Indeed, with the raft of uncertainties in this political cycle, including about the scope and nature of Xi Jinping’s personal power, it is possible that path dependence and inertia could lead to this more standard outcome.

The composition of The Committee in this scenario would be largely predicated on strict adherence to existing hard and soft norms, including age and term limits and seniority. Based on this assumption, the key difference between the base case and this scenario would come down to two candidates. That is because “norm adhering” implies a more standard transition—namely, that age and seniority are the most reliable predictors of who rises onto The Committee. The adherence to these norms essentially determined the configuration of The Committee at the 18th Party Congress five years ago.

Overall, this scenario implies that Xi’s grip on power may be strong but he still has constraints and cannot simply dictate who sits on The Committee. Xi would not be able to move up his protégés at will and, like most leaders of the past, would have to compromise and broker deals with other CCP elders.

Who: In addition to Xi and Li Keqiang, five prospective new members of The Committee are listed below. This configuration hews closely to existing institutional processes and includes Han Zheng and Liu Qibao, while omitting Chen Min’er. As in the base case, this composition does not include anticorruption czar Wang Qishan, who is still bound by the hard norm of the retirement age to step down.

This configuration does not reflect all of Xi’s preferred protégés or choices of personnel. However, each new member would nonetheless be qualified to ascend to The Committee based on prior service and credentials. Unlike the base case, every new member of The Committee in this scenario is already in the Politburo, which means it also follows the soft norm of gradual, step-by-step promotion of candidates. This is a key reason why Chen Min’er is not included (see below).

Xi Jinping (Age 64)

Li Keqiang (Age 62)

Wang Yang (Age 62)

Liu Qibao (Age 64)

Hu Chunhua (Age 54)

Li Zhanshu (Age 67)

Han Zheng (Age 63)

If such a lineup actually prevails, then Hu Chunhua would be the likely successor to the General Secretary at the 20th Party Congress in 2022. Hu is the only one in this configuration who represents the under-60 cohort. After the purge of Sun Zhengcai, there is no other candidate in this age bracket currently in the Politburo.

Whether a future Premier also sits among this cohort is not clear but would not be out of step with past precedent. For instance, at the 15th Party Congress, future Premier Wen Jiabao did not make it onto The Committee but later ascended to the position at the 16th Party Congress. It is possible that Wang Yang could be groomed for Premier in this configuration since he has already served as vice premier and is on the younger side among the candidates.

One notable omission in this prospective roster is Zhang Chunxian, who at 64 and already in the Politburo, would technically qualify for The Committee based on the standard norm of “the oldest get their chairs.” Although Zhang previously served as party secretary of Xinjiang, there has been little indication since his return to Beijing that he is destined for higher office. Moreover, Zhang is not the only possible choice within his age cohort, so it seems more likely that he would either retire or receive a sinecure to ride out the rest of his career.

Implications: The reform outlook after the 19th Party Congress would be neutral in this scenario, albeit with some potential upside. This “norm adhering” outcome would not be particularly anti-market or anti-reform, and several of the new members have governed wealthy and dynamic coastal provinces.

As Shanghai Party Secretary, for example, Han Zheng presided over the first pilot Shanghai Free Trade Zone, considered by top leaders to be a key economic reform priority in Xi’s first term. Han has also publicly remarked that Shanghai no longer targets GDP growth and has been focusing on deepening reforms and enhancing quality of life. For his part, Hu Chunhua presided over Guangdong during a period of tech sector explosion, earning Shenzhen the moniker of “Silicon Delta.”

The bottom line is that if this scenario materializes, it is not likely to be particularly negative for markets, since most of the new members of The Committee would be expected to stand behind Xi’s broad platform of revamping the CCP, reforming the economy, and rebooting China’s global status. But the fact that different political networks are represented on The Committee could lead to protracted politicking behind the scenes and take some focus away from executing on the economic reform agenda.

Scenario 3: Norm Wrecking - 10% Probability

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Scenario 3:Norm Wrecking

What: This scenario is unlikely to occur, despite much speculation. In this configuration, Wang Qishan, who would normally be slated for retirement, would be retained on The Committee at the age of 69. Keeping Wang would be tantamount to breaking the strongest hard norm of the retirement age. A prospective roster under this scenario might also include Chen Min’er, a likely heir apparent, who currently is not in the Politburo. Such a promotion would require Chen to bypass the Politburo and helicopter straight onto The Committee after his brief stint in Chongqing.

The combination of abandoning the retirement age norm and disrupting the existing institutional process by elevating a candidate two levels beyond his grade is highly unlikely. So even with a very strong Xi Jinping, these moves would face significant criticism and pushback at every level of the CCP. They would be viewed as a significant regression from established political norms and rules—and Xi likely understands these constraints.

Overall, this prospective scenario would reflect a dramatic consolidation of Xi’s political power that could potentially be channeled toward post-Congress reforms but could also create destabilizing fissures within the CCP as snubbed elite factions align to counter Xi’s agenda. At a minimum, they could stymie Xi’s ability to pursue it with impunity.

Who: If Wang Qishan does remain on The Committee, the most logical position for him would be as Premier to oversee the economy. Not only would Wang naturally want to cede the anticorruption position after five intense years, but his experience in economics and finance well qualify him for the premiership.

One solution would be to keep Li Keqiang in the second-ranked slot on The Committee but change his portfolio to head the National People’s Congress (NPC). That would make Wang #3 in the premier’s slot, a configuration that would revert to the model of the 16th and 17th party congresses, when Premier Wen Jiabao was ranked #3 and NPC chairman Wu Bangguo ranked #2 (see below).

Xi Jinping (Age 64)

Li Keqiang (Age 62; Chair of NPC)

Wang Qishan (Age 69; Premier)

Wang Yang (Age 62)

Chen Min’er (Age 57)

Li Zhanshu (Age 67)

Hu Chunhua (Age 54)

If this outcome somehow prevails, it could engender animosity that yields a less united ruling body. It is generally acknowledged that Xi has a closer personal relationship with Wang Qishan than with Li Keqiang, so this might well create splits that percolate down into the Politburo. And if a Premier Wang overshadows former Premier Li and takes actions that reflect poorly on Li’s record, that could generate additional tensions at the top.

Implications: This highly disruptive scenario, if it materializes, would be market positive on its face. That is because Wang Qishan is a well-known quantity and regarded as an effective economic and financial policymaker. His appointment as Premier would likely instill confidence in the markets that Xi had assembled a capable economic reform team for his second term.

Ultimately, however, this “norm wrecking” scenario would be so destabilizing that it could trigger an internal backlash. This might lead to significant behind-the-scenes political gamesmanship that detracts from any prospective reform agenda. The bottom line is this: while this scenario would send positive market signals at the outset, it would probably lead to greater politicization at the pinnacle of the Chinese system. Politics could resurge to dominate Xi’s second term at the expense of moving forward with economic reforms.